July 2008 Archives

Thumbnail image for Negotiation.JPGNegotiation is often a critical element in closing a sourcing deal, and while the process of negotiation in China is dependent on a complex cultural context, effective negotiation in China can only operate within China's cultural context to seek a positive outcome for both sides.

In the first instance, negotiation is the interface between two parties and their respective objectives, and reaching agreement could depend on the skills, knowledge, and flexibility applied. Yet the crucial element is often in the details of the negotiation approach. Alliance Bernstein CPO Jonna Martinez coined the term Immersion Negotiation (h/t Supply Excellence) to underline the need to be the best prepared negotiator: The more you understand the positions, cultures, pressures, and backgrounds of your opposites, the more you can use that knowledge to attain your objectives. While resonating with the ideas of Sun Tzu and The Art of War, there is no doubt that such a strategy is difficult in China while Western and Chinese cultural notions differ so substantially on issues like the use of contracts, the value attached to personal relationships and the issue of face. Yet in China, the applicable saying is 入乡随俗 (ru xiang sui su)*.

Hence negotiation in China is rarely straightforward, like with the complex importance attached to building trust and the finer nuances of participating in banquets, dinners, visits and even karaoke. These, as David Dayton writes at Silk Road International, are all planned and scripted with clearly defined roles, where foreign buyers are required to play their part in the Chinese script, whether they speak Chinese or not. Of the various ploys and stratagems he experienced in conducting negotiations in China, Dayton deems organization, detail, politeness, a strong will and a healthy dose of patience as the most important. Yet while foreigners in China inevitably have to conduct negotiations under the guise of the foreign buyer, actual negotiating with Chinese suppliers can be a dynamic and unpredictable process in which buyers need to immerse themselves fully in the circumstances and thinking of their Chinese suppliers. There is only one way in China, and while almost anything can be negotiated - it can only be done in the Chinese way.

(* When entering the village, follow the local custom.)
Thumbnail image for chinawal.jpgChanges in labor organization and regulation in China are providing a unique perspective on China's systematic move up the production ladder and its embrace of higher-skilled industries.

In a landmark agreement, employees of a Wal-Mart outlet in Shenyang, capital of Liaoning Province in northeastern China, last week signed a collective labor contract with the retailing giant. Under the agreement, employees' salaries will be raised by an annual rate of 8 percent in 2008 and 2009, and standards for minimum pay, paid vacation, social security and overtime pay were agreed to. The International Labor Rights Fund (ILRF) Blog has hailed the contract as a stepping stone for Walmart's ongoing labor organizing efforts in China (as well as for its influence on the All China Federation of Trade Unions), the successes and challenges of which China Labor News Translations have been documenting at length.

The ILRF Blog has pointed to draft labor regulations proclaimed in Shenzhen in June as evidence of the persisting trend towards collective bargaining and legislation in China; and this trend, in turn, as an indication of China's growing conviction that it must move up the production ladder, focusing on higher-skilled industries - or be stuck forever competing with its poorest neighbors for the cheapest manufacturing orders.

The IHLO (Hong Kong Liaison Office for the international trade union movement) in June investigated the impact of the Labor Contract Law in the preceding six months of implementation, and concluded that the real impact of the new law has not been its negligible overall impact on labor costs, but rather the way it makes it harder for companies to avoid paying benefits to their employees or to circumvent implementing existing labor legislation. And this encapsulates government policies aimed at transforming China's traditional reliance on low-cost labour and labour-intensive industries to the development of higher-value industries. This process requires companies to invest in employee training, and makes it harder to routinely flout labor regulations. With such incremental developments, the organizational and regulatory outlook for labor in China provides ongoing insight into more long  term transformations in the Chinese economy.

(Image: Wal-Martwatch)
Chen Weiliang, President of Foxconn International, Taiwan's biggest company and the largest contract manufacturer of electronics worldwide, last week announced that the company will be moving its factories from Shenzhen to northern Chinese provinces such as Hebei and Shanxi, where the average salary is more than 60% lower than in Shenzhen. In addition, Chen said Foxconn will be opening new factories in low-cost markets like Hungary and India to reduce the pressure caused by cost increases

Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.

China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design. 

While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.

Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.
There are many reasons today why Assembled in America makes more sense than Made in America, even though the latter, as Gail Dutton writes at World Trade Magazine, signifies innovation, quality and reliability. Based on the experiences of commodity leader Mark Thompson from plant genetics leader Pioneer Hi-Bred International, Dutton extrapolates ten basic premises why companies today would logically take recourse to global sourcing, ranging from the geographic availability of materials and technology and varying costs of goods and labour, to the value of joint ventures and the wisdom of establishing additional sources of supply. Under such basic formulae the process of outsourcing and especially the phenomenon of low-cost country sourcing have expanded significantly over the last thirty years.

Yet there are indications that global sourcing is set to enter a critical phase, or a strategic inflection point brought on by structural changes and altered estimations of cost and risk.

The impact of high and rising energy costs is currently a fundamental issue complicating (as Bob Ferrari puts it at Supply Chain Matters) the interrelationships and flow of goods across global supply chains, which he believes will ultimately structurally alter supply chain and sourcing strategies. Supply Chain Digest has even raised the specter of a so-called Perfect Storm developing in transportation with oil prices at unprecedented levels and other energy costs also on the rise. This all contributes to complexity in the supply chain and the the advent of risk mitigating fever, or a regulatory choke hold as supply chains become fast, cheap and out of control.

An AMR Research Study (see press release) recently found the U.S. (35%) and China (28%) to be the regions with the most supply chain risk for manufacturers; and rising transportation costs (51%), volatile commodity prices (43%) and weakening consumer spending (37%) were identified as the top supply chain concerns. A study released this year by Marsh, however (see also Sourcing Innovation blog), served to quantify the extreme degree risk has increased in global supply chains in the last few years, with 73% of North American risk managers indicating their supply chain risk has risen since 2005. Yet most businesses are ill-prepared to handle the rising risk levels, with only 35% reporting that their supply chain risk management was moderately effective.

Notwithstanding the substantial risks in global supply chains, manufacturers are still increasingly looking to their supply chains to boost profits and cut costs. Procurement Leaders last week reported research conducted by Archstone Consulting which found that over 80% of manufacturers have responded to the current economic climate by devising aggressive agendas to boost sales and cut costs. Todd Lavieri, CEO of Archstone Consulting, explained that
In the past, manufacturers simply used their supply chains as a means to control costs by improving efficiencies. Now, they are using their supply chains as a mechanism to boost revenue and improve customer satisfaction through capabilities like better management of highly customized products, quicker delivery times, and more integrated services.

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